The recent unexpected plunge in crude has many energy investors on edge. Oil was expected to move higher over the course of 2017, and energy companies based their 2017 budgets, production, and profit guidance on oil averaging US$50-55 per barrel over the course of the year. Now that it is trading at about US$44 per barrel and has been under US$50 per barrel for some time, many of those companies will be forced to slash capital spending, leading to lower production and cash flows. There is, however, one upstream energy company that remains relatively immune to depressed oil prices. That…
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The recent unexpected plunge in crude has many energy investors on edge. Oil was expected to move higher over the course of 2017, and energy companies based their 2017 budgets, production, and profit guidance on oil averaging US$50-55 per barrel over the course of the year. Now that it is trading at about US$44 per barrel and has been under US$50 per barrel for some time, many of those companies will be forced to slash capital spending, leading to lower production and cash flows.
There is, however, one upstream energy company that remains relatively immune to depressed oil prices. That company is intermediate oil and gas producer Canacol Energy Ltd. (TSX:CNE).
Canacol’s operations are focused on the South American nation of Colombia where it has 3.7 million acres and 85 million barrels of oil reserves which are 85% weighted to natural gas.
It is here where Canacol’s strengths become apparent.
You see, as oil commenced its catastrophic plunge near the end of 2014, Canacol was in the process of repositioning its operations to focus on natural gas exploration and production. That has now started paying significant dividends for the company.
Colombia, which has historically been natural gas self-sufficient, has been experiencing significant supply constraints in recent years that forced it to start importing natural gas for the first time ever in 2016. This has been a boon for Canacol. Because of the supply shortage, Canacol has been able to secure very favourable terms for the sale of its Colombian natural gas production. It receives about US$5 per million cubic feet of natural gas sold, which is a whopping 65% higher than the market price.
For that reason, Canacol reported a solid first-quarter 2017 netback of US$24.56 per barrel of oil equivalent, which is roughly double that of North American natural gas producers.
This highlights the high degree of profitability of Canacol’s operations. More importantly, natural gas sales can only continue to grow.
First-quarter production rose by a stunning 55% compared to a year earlier, and Canacol is on target to produce 19,000 barrels for 2017 — a 19% year-over-year increase.
It has also started development of a natural gas pipeline that will connect its gas-processing facility to the Promigas pipeline to Cartagena. This will increase the amount of gas that it can transport to Colombia’s Caribbean natural gas market, one of the largest in the country, boosting sales volumes and earnings.
Canacol also continues to experience considerable exploration success with an 88% success rate for natural gas exploration.
In recent updates, Canacol reported that it had assessed prospective conventional natural gas resources of 482 billion cubic feet, and that it had completed two gas-exploration wells and one oil-exploration well during the first half of the year.
These factors bode well for Canacol to continue growing its oil and natural gas reserves as well as production.
Another attractive aspect of Canacol’s operations is that more than 85% of its revenues are insensitive to oil and gas pricing, because they are locked in through fixed long-term contracts.
Canacol is one of the most appealing energy investments currently available. Not only is it relatively immune to weak oil and natural gas prices, it is attractively priced with the after-tax net asset value of its oil and gas reserves valued at $5.82 per share, or 41% higher than its stock price.
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Fool contributor Matt Smith has no position in any stocks mentioned.